Pre-Budget Statement

In this year's pre-Budget report, we seek to steer a course of stability amid a world economic downturn. We set in place measures to improve productivity and provide support for enterprise, we introduce new measures to make work pay for all our people and we show how we will invest in health, education and our infrastructure to provide the modern services on which people rely—in each case taking long-term decisions that will equip our country for the future.

The background to the report is the global downturn. It started in Asia and has reverberated throughout every continent. Not only has it shifted the balance of risks in the world economy from fears about inflation to fears about growth, but it has forced every country, continent and international financial institution to cut its estimates for growth.

World trade growth is set to fall by two thirds. Forecasts for world growth have now been virtually halved. One quarter of the world is in recession and in this uncertain world, my objective for Britain is that we steer a stable course and, by building our long-term strengths, we are more than equal to any and every challenge that the global economy presents. Because in the past 18 months inflation has been brought down to its target of 2½ per cent. and because Britain has set in place a long-term monetary framework with the independence of the Bank of England, Britain is better placed than in the past to face the global difficulties. Because, too, Britain has tackled its structural deficit in public finances, we are more able to steer that stable course, but as all forecasts around the world have made clear, there is acute uncertainty about the eventual outcome of global financial instability. We are conscious of the balance of risks: on one hand, the risk of a sharper slow-down in the world economy as a result of instability and the effect on confidence and, on the other hand, the risk that inflationary pressures might persist. So the pre-Budget report is set with this firmly in mind: no denial of short-term difficulties and no diversion of policies for long-term strength.

Our challenge in the year ahead is to strengthen the three essential foundations for long-term strength and success. First, Britain now has for the first time a credible long-term framework for both monetary and fiscal policy. It has an inbuilt capacity to respond credibly to short-term pressures and we shall not be deflected from it. Secondly, with business, in order to build on that stability, we are putting in place a strategy to tackle a fundamental long-term economic weakness—the 40 per cent. productivity gap with our most successful competitors. These measures will include investment in education and innovation, and new encouragement for enterprise and for competition.

Thirdly, with our welfare-to-work programme and by ensuring that work pays, we are extending opportunity to all in our country, creating a Britain where no one is excluded, no potential is neglected and everyone has a contribution to make. It is a Britain that is both enterprising and fair.

First, I shall deal with the foundation for long-term economic stability. Official figures show that by spring 1997, with consumer spending growing at an
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unsustainable pace, inflation was heading way above the country's 2½ per cent. target to twice the level of our competitors—4 per cent. and above—and that at that time, Britain was set to repeat the boom-bust cycle that led to 15 per cent. interest rates for one whole year in the early 1990s.

Because immediate action was taken, making the Bank of England independent and tackling the inflationary pressures, inflation is today at our target of 2½ per cent. I can announce that for future years our forecast is that inflation will stay on target. As a result, Britain's long-term interest rates have come down from more than 7 per cent. in May 1997 to 5 per cent. The differential between Germany and Britain has narrowed by nearly 1 per cent. Long-term interest rates are now at their lowest for 35 years and the lowest since Britain's boom-bust cycle first became entrenched.

Because Britain has brought inflation under control, it has been possible, as the world has turned downwards, for interest rates to respond more quickly and in a more forward-looking way than in past economic cycles. In the previous economic cycle, interest rates remained in double figures for more than four years. In contrast, the Bank of England has already been able to reduce interest rates to respond to a changed international environment.

Long-term monetary stability is a precondition of our economic success. I reaffirm my support for the Bank of England's independence, for its remit and its membership. I do not believe that any political party, putting the long-term interests of Britain first, will, on reflection, bring party politics and short-termism back into interest rate decisions.

It is also because Britain has a new long-term fiscal framework with clear disciplines set out in the code for fiscal stability that we are laying before Parliament this afternoon that, as world growth slows, fiscal policy is able to make its contribution to stability and future growth in Britain. The official figures published today confirm that in our first year, we cut the budget deficit from the £28 billion that we inherited to £8 billion. That tightening has continued throughout our second year—a total fiscal tightening in two years of 3¾per cent. of national income. So, fiscal policy has played its full part with interest rate policy in tackling inflationary pressures.

Because we have concentrated on priorities and cut waste, spending this year will be £2 billion below the ceilings that we inherited. As a result, our current budget this year is expected to be £5½ billion in surplus. What in the Budget was prudently projected to be net borrowing of £1 billion this year is now expected to be a debt repayment of £1½ billion.

The golden rule is that over the cycle we balance the current budget. In other words, on current spending, we eliminate the structural deficit that we inherited. Again, I can report to the House that because of the tough action that we have taken since we came into government, that is exactly what we are now achieving.

Now that we have broken with short-termism and created for the long term a stable monetary and fiscal framework with an inbuilt capacity to be more responsive to the economic cycle, fiscal and monetary policy can together contribute to stability and growth in the coming years.

My forecast for 1999 of 1 to 1½ per cent. growth in our economy will see Britain steering a stable course, even when one quarter of the world is in recession. As the
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economy returns to its sustainable growth path, we expect growth to be between 2¼ and 2¾per cent. in 2000, and between 2¾ and 3¼ per cent in 2001.

It is because we are cautious about the balance of risk in the economy that we have based our public finance forecasts on assumptions deliberately more prudent than those made under the previous Government. First, our public finances are planned on an estimate of a 2¼ per cent. trend rate of growth—¼ per cent. lower than the assumption that we inherited. Secondly, our forecasts have revised downwards the ratio of VAT receipts to projected consumer spending, reducing estimated revenue by nearly £4 billion over the next five years.

Thirdly, revenues from tackling fraud have been set at a more cautious level than in the previous Parliament. Fourthly, we have discontinued the highly imprudent practice of assuming revenues from privatisations that have not been agreed. In each case, our assumptions have been audited by the independent National Audit Office, and because of the experience of the early 1990s we have adopted a more prudent approach to forecasting income tax and corporation tax revenues, including a cautious estimate of revenues from self-assessment.

Even after making those prudent assumptions, and taking into account the world downturn, we meet our first rule—that of balancing our current budget over the cycle. We expect the current surplus to be £1 billion next year, £3 billion in 2000–01, £8 billion the year after that, and £10 billion and £11 billion for the two years to follow. For the same years, net borrowing is expected to be £4 billion, then successively £5 billion, £2 billion, £2 billion and £1 billion.

Those figures are better for every year of this Parliament than those for any year of the previous Parliament. They represent an estimated current surplus for the coming five years of £33 billion—a margin that shows that we are equipped to cope with further uncertainties. That £33 billion surplus contrasts with what happened under the previous Government—a deficit of £149 billion over the economic cycle, as national debt doubled.

Our second rule, the sustainable investment rule, requires that as we borrow for investment, debt is set at a prudent and sustainable level. In the last year of the previous Government, the debt ratio was 45 per cent. of national income. In the next three years, to meet the needs of a modern infrastructure, public investment will rightly double. Yet as a result of our overall prudence, debt as a proportion of national income is set to fall below 40 per cent.—to 39 per cent. next year, then to 38 per cent., and then to 36½ per cent.

Hon. Members who take a special interest in the Maastricht criteria will want to know that in each of the next five years Britain will be comfortably within the Maastricht guidelines.

Long-term economic stability, from which we will not be diverted, is the foundation for future success, but we shall achieve our long-term goals for growth and employment only through an even more radical modernisation of our economic policy in favour of opportunity, enterprise and work.

We now need to push ahead with modernisation in each of the following areas—improving productivity, expanding opportunity and investing in our future. So in
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every one of those areas our economic policy will be based on getting the best out of all our people and their potential—in other words, maximising economic opportunity for all. What makes for a good economy also makes for a good society—one that is fair and cohesive.

I turn to the first conclusions from the review that we have conducted with British business into removing the barriers to productivity. As our seminars with business have revealed, the only way for Britain to be at the forefront of the new knowledge-based economies of the future is by modern policies for education, employee participation, small business development and science and innovation.

Our first recommendations concern the quality of education. With our £19 billion investment in educational reform, we have set out demanding targets for literacy, numeracy, teaching standards and higher qualifications. My right hon. Friend the Secretary of State for Education and Employment has announced today a £250 million investment in a new traineeship programme for teenagers. In this way, we have now made it possible for every young person after the age of 16 to stay on in part-time or full-time education, to get the qualifications they need and to have the opportunity of a job.

To meet that productivity challenge for our economy, we must do more to encourage the ambitions of all our children, not least by bringing the world of education and the world of work into closer contact. Over the next year, we plan to enlist business leaders throughout the country to take the world of work and business into our classrooms. To encourage businesses to offer expertise and management help to our schools and colleges, I can say that the Budget will allow businesses to claim tax relief when they second staff to schools and colleges.

Britain can do more to remove the barriers to opportunity and ambition—the ambition to work your way up and use your creative talents, the ambition to start and build a successful business and the ambition to see the firm in which you work succeed, and you succeed with it. Today, only a fraction of British employees—and an even smaller minority of those outside senior management—own shares in the companies that they work in. Yet the evidence is that employee commitment is a vital strength for companies competing, and then succeeding, in the global economy.

I want, through targeted tax reform, to reward long-term commitment by employees. I want to remove, once and for all, the old "them and us" culture in British industry. I want to encourage the new enterprise culture of teamwork in which everyone contributes and everyone benefits from success.

In the next Budget, we will make it easier for all employees—not just a few—to become stakeholders in their company. I want to double the number of firms in which all employees have the opportunity to own shares. Many employees already hold shares through their pension funds, so I will propose to our pension funds and other institutions that they should provide better and more direct public information to their members and investors.

In future, more of our wealth and jobs will come from small and growing businesses. In just 18 months, we have announced cuts in the rate of corporation tax on large companies twice—to 30p in the pound, the lowest level of corporation tax ever. For small companies, we have cut the rate twice, too—to 20p in the pound. In the Budget
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we will consider a further tax reduction for small businesses. In particular, we will consider converting the temporary investment allowance we introduced last year into a permanent tax cut.

I have in mind a bigger reform to cut the burdens of tax and red tape. Small businesses getting started and growing lack not only the resources to pay tax, but the back-up to administer national insurance, income tax and VAT payments and their payroll systems. From April 1999, the Inland Revenue and the Contributions Agency will be merged. We propose to roll out on a nationwide basis a new, comprehensive service for all businesses, helping them to replace time-consuming book-keeping by offering a one-stop advice service, administered by local offices and a national helpline. So, from now on, every Government Department will have an obligation to encourage enterprise and entrepreneurs.

I can confirm to businesses that we are also re-examining planning regulations and building control to identify barriers to productivity and job creation, and how the planning system in Britain can be speeded up to help us to emulate the success of high-tech clusters and corridors, such as America's Silicon valley.

Access to bank finance is critical to the success of every small business. Therefore, I have asked the banks to work with Mr. Don Cruickshank, formerly of Oftel, to assess what steps can be taken to serve more effectively the needs of businesses in the economy.

To open up and enhance competition, we will ensure, with a 20 per cent. increase in its funding, that the Office of Fair Trading has the necessary resources to break down barriers that prevent new firms from entering markets and keep prices unacceptably high for consumers. Further announcements on how the new arrangements will work will come from my right hon. Friend the Secretary of State for Trade and Industry, who will soon publish his competitiveness White Paper. Our policy is pro-small business, pro-share ownership, pro-tax simplification and pro-competition.

Our policy is also pro-skills and pro-science. To turn scientific inventions in Britain into jobs for Britain, we need to do more to honour the spirit of invention, facilitate the exploitation of invention and encourage the commercialisation of invention. More than ever, innovation is the key to higher productivity. We must ensure that inventions created in Britain are developed and manufactured here too.

The first step is a higher quantity and quality of research and development. So, the Government will consult small business on supplementing the current tax relief on research and development with a more effective tax credit for small business, based on the volume of research and development investment.

Three months ago, we announced a partnership with the Wellcome Trust that will invest more than £1 billion to re-equip university science in Britain. It is the largest ever public investment in Britain's science base. Having received an overwhelming response from universities to that and to our new university challenge fund, which is a public-private partnership for commercialising scientific inventions, we are now inviting further private sector involvement.

I now want to complete the path that takes inventions from the science lab through high-tech venture capital and then to the national and global marketplace. So I am
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announcing that to develop business expertise in science and to transfer technology from the science lab to the marketplace, we will endow up to eight new institutes of enterprise in British universities. That is a further signal of our determination that the genius of British invention will once again become an engine for growth and job creation.

The strong venture capital industry, supporting high-tech, high-risk investments, is also critical to the future of Britain. Today, we have only 6 per cent. of the early stage, high-tech venture capital of the United States, so we will consult on and consider new incentives, including how to encourage our more successful companies to invest in start-ups and how we can provide new sources of venture capital and management expertise for entrepreneurs.

The productivity challenge is one that must be met by the public and not merely the private sector. Next month, for the first time, the Government will publish public service agreements that set clear targets for improved performance for all Departments. To help them meet those and to monitor performance, we are today establishing an advisory panel from business and management.

Absenteeism costs the public sector up to £6 billion a year. Specific targets are being set for each Department to reduce absence rates by 20 per cent. by 2001 and 30 per cent. by 2003.

We are working with business, not merely to promote higher productivity, but to secure policies for a sustainable environment. Today, I am publishing the report by Lord Marshall, formerly president of the Confederation of British Industry, into the role of economic instruments and the business use of energy. I thank him for his work, which moves the debate forward substantially. After public consultation, the Government will fully consider the recommendations as part of their wider strategy on climate change. I am also publishing today a consultation document containing proposals for a £50 reduction in vehicle excise duty for the smallest and most environmentally efficient cars.

Just as the Government are modernising our industrial economy, so too we are modernising employment policies. The House will be pleased to know that by next April, 300,000 people will have benefited from the new deal, which gives a new sense of hope to men and women previously left out and excluded. Already 29,000 companies have signed up to the new deal, and we are now ready to extend it.

From 30 November, 60,000 opportunities will be created for the long-term unemployed in 28 areas of our country. In Northern Ireland, in support of the peace process, we will guarantee new opportunities to all men and women who have been unemployed for 18 months or more. We will also extend nationwide the new deal skills shortage programme and offer up-front support for training to help to fill the vacancies that come on-stream every month. To tackle skill shortages, I can confirm that by March next year, there will be 120 centres for information technology and high-tech training in every part of the country.

Side by side with the new deal, there will be new guarantees that work will pay more than benefits. From April, as a result of abolishing the entry fee to national insurance, all employees will receive a tax cut of £66 a year. Business will be pleased to know that I can
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announce that from April, employers will not pay national insurance on earnings below £83 a week, the 1999 level for the personal tax allowance. When it is economically right to do so, and so that work pays more, we will introduce the 10p starting rate of income tax.

From 1 April next year, 1.9 million employees, including 1.3 million women, will benefit from the minimum wage. I can confirm today that the minimum income guarantee for a low-paid family in work, which as a result of the working families tax credit was announced at £180, will be raised to £190 a week from October next year, as a result of the minimum wage and changes that we are making in tax and benefit. Work will pay a guaranteed minimum of £190 a week for a family, with no income tax to pay on incomes below £220 a week. That will guarantee a minimum income of at least £5.50 an hour for a lone parent in work with one child, and £6.37 for an adult with two children.

To enable parents and carers to balance work and family responsibilities, we want to provide extra help for child care. We have provided the resources for up to 1 million new child care places over the next four years. Consistent with our national child care strategy, we will extend our new child care tax credit to cover all children up to the age of 14 and in the case of disabled children, who have greater needs, up to the age of 16.

We will match the working families tax credit with a new disabled person's tax credit that will ensure that work pays for a disabled man or woman who takes a job. A disabled person with one child moving from benefit to full-time employment will be guaranteed a minimum income of £220 a week, with no income tax payable on income below £274. Disabled men and women taking up work will be as much as £78 a week better off.

Under this Government, disabled men and women who want to work will be guaranteed fair treatment at work, and work will pay. Matching the minimum income guarantee for disabled persons in work there will be a new disability income guarantee of £128 a week for severely disabled people out of work.

We are guaranteeing pensioner couples a new minimum income of £117 a week. That will be followed in the Budget with a guarantee that pensioners will have no income tax to pay unless their income rises above a new specified level. As a result of other measures that we have taken—by following our cut in VAT last year with tougher regulation and new winter fuel payments—I can say that pensioners are saving £108 on their fuel bills and the poorest pensioners are saving £140.

Our task for the country for the coming year—steering a course of stability—is to meet the productivity challenge, to extend fairness and our welfare-to-work programme and to make the modern investments we need in our future. I am pleased to announce that, following the modernisation of the private finance initiative, there will be new investment in our infrastructure—in more than 1,000 schools, 25 hospitals and in dozens of public transport projects—over the coming three years amounting to an additional £11 billion. Over the three years from next April, public investment will double— and will do so at the right time. That is the right decision and the right course of action for our country.

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I have one further announcement. Because of our prudence in the management of public finances, Government spending is well within its limits. Our prudence is for a purpose. Therefore, to ensure in every part of the United Kingdom the health care that people—and especially the elderly—need this winter, I am today making an additional and immediate winter cash allocation, to be spent in the next five months, of £250 million for our national health service. I can confirm that, because this Government believe in the best health and the best education not just for a few but for all our people, we will invest an additional £40 billion in the modernisation of education and health over the next three years. Those public services, in the months and the years ahead, will be safe in this Government's hands.

The Government are steering a stable course, prudently investing in our future, proudly building strong public services and consistently keeping our promises to the British people. I commend this statement to the House.

We have just heard from a complacent and arrogant Chancellor—a Chancellor who is locked into denial. We have heard fantasy forecasting and Peter Pan economics. How can anyone take seriously the Chancellor's prediction of growth next year when the Treasury's own collection of independent forecasters anticipate growth well below—0.6 per cent. below—his forecast? How can we take the Chancellor seriously when his Department's figures are at odds with his own? His are fairy-tale figures because the Chancellor will not take responsibility.

There was no recognition—not even a glimmer—that the Chancellor's own blunders are to blame. He offers nothing serious to prevent higher unemployment and more business failures—not a single measure that will save a single job. He had a chance today to give hope to people whose livelihoods are on the line, but he blew it because he is too arrogant to admit that he had got it wrong.

For the Chancellor and the Prime Minister—who are smugly and arrogantly sitting there exchanging complacent grins—any talk of downturn is "idiotic hysteria". The Item Club, using the Treasury's own model, predicts that 500,000 manufacturing jobs will be lost. Is that "idiotic hysteria"? The National Institute of Economic and Social Research, whose director the Chancellor has put in charge of sorting out his statistics, warns of a one in three chance of recession. Is that "idiotic hysteria"? The Chancellor's adviser, Gavyn Davies, says that the economy is
teetering on the brink of recession.
Is that "idiotic hysteria"?

If it is all global, as the Chancellor claims, why does The Economist poll of forecasts show that Britain's growth next year will be lower than that of all industrial nations except Japan, which is locked in the middle of a deep slump? Even the European Commission, to which the Chancellor is usually eager to defer, predicts that Britain will slump to the bottom of the European growth table. So let the Chancellor tell us: why will Britain's growth next year be less than half that of the next weakest economy? It will be less than half. Why?

Why have Britain's forecasts been cut by so much more than any others? Why, when it comes to the downturn— [Interruption.] The Chancellor of the Exchequer sits on the Front Bench grinning and smiling. The constituents of
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his right hon. and hon. Friends, whose jobs and livelihoods are on the line, will be disgusted by his complacency and arrogance. Let the right hon. Gentleman tell us why, when it comes to the downturn, Britain is in first and in worst. There is a simple answer and it is sitting on the Government Front Bench. Everything that the right hon. Gentleman is doing is making things worse.

The Chancellor of the Exchequer goes on about the current budget and public finances. Why does not he tell us about the real budget, the cash budget, and how much he is actually borrowing? The right hon. Gentleman says that the black hole in public finances does not matter. But what does he say to the National Institute of Economic and Social Research, whose director he relies on so much, which predicts borrowing of not twice but five times that which the right hon. Gentleman predicts?

The right hon. Gentleman says that he can jack up borrowing and no one will get hurt. Does not he understand that higher borrowing means higher interest rates? Does not he understand that for every £10 billion of extra borrowing, interest rates will be a ¼ per cent. higher? How is that helping small business and innovation?

The right hon. Gentleman says that it is all right to borrow more in the downturn. Does not he understand that the harder he presses on the fiscal accelerator, the harder the Bank of England will press on the monetary brakes? Does not he even understand the effect of his own policies?

The hon. Gentleman will have to go back to his constituency next weekend and look in the face those whose jobs are on the line because of the Chancellor's arrogant blunder. Let him make jokes with them then and listen to what they have to say to him.

In the Chancellor's own wonderland of economics, he says that it is all right to borrow as long as it is for investment. But the right hon. Gentleman is not borrowing for investment. He is not borrowing for health or education. We welcome Labour trying to match our record, but the right hon. Gentleman is borrowing not to pay for health and education but for social security. The Government's own figures show that social security spending, having fallen in recent years, is set to rise. The Government will borrow all right, but they will be borrowing to pay for social security, for the bills of Labour's social and economic failure.

The right hon. Gentleman has talked of productivity—that is right, he is blaming it all on Britain's workers and managers, and the banks as well now. But his proposals, most of which are now being announced for the third or fourth time, are just moving the deckchairs around on the Titanic. The right hon. Gentleman's taxes and regulations have put a £40 billion hole below the waterline of British businesses—that is £1,500 for every person employed.

With power comes responsibility. So the Chancellor must now answer these specific questions: will he give an unequivocal assurance not to introduce the new taxes on people's pensions foreshadowed in yesterday's Daily Mail? Tell us, yes or no? We are waiting to hear, yes or no? If the right hon. Gentleman is so bothered about productivity, will he stop raising the cost of employing
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people by £1,500 a year? Yes or no? Will he now tell us by how much unemployment will rise next year as a direct result of his policies?

This was the Chancellor's first big test. It was his chance to start to put right what he has got wrong. He has failed that test. They told us that things could only get better, but they are getting worse, much worse. The price of Labour's blunders will be lost jobs and closed businesses. There will be no more boom and bust; just the bust. There will be no more stop-go; just the stop. Truly, this downturn was made in Downing street.

The Financial Times on Monday said that Conservative economic policy was
on an escalator into absurdity",
and Conservative Members have reached the top of the escalator this afternoon. The Leader of the Opposition said that this would be the first big attack on the Government since the election, but unfortunately he put it into the hands of the shadow Chancellor.

The right hon. Member for Horsham (Mr. Maude) did not even welcome our £250 million for the national health service and he wants to cut into the £40 billion that we are spending on health and education. The policies that he advocates are exactly those that brought the country into stop-go recession when he was a Treasury Minister in the early 1990s.

The right hon. Gentleman complains about borrowing, but does not acknowledge that next year's borrowing requirement is £4 billion, when the Conservative Government's borrowing requirement went up to £50 billion. He complains about interest rates that have come down from 7½ to 7¼ per cent. Under the Conservatives, interest rates were at 15 per cent. for a year and over 10 per cent. for four years, including all the time that he was a Treasury Minister. Conservative Members complain about the pound. The pound was at DM2.95 during the whole of the right hon. Gentleman's time at the Treasury. This Government have brought down debt from the 45 per cent. that we inherited to less than 40 per cent. and now to 38 per cent.

A serious Opposition party would tell us where it stood on the basic issues of economic policy. First, would the Conservatives keep the Bank of England independent? We say yes to that question; what is their answer? They do not know and they are totally divided. A sensible Opposition would agree with the Confederation of British Industry's view that spending should rise next year as part of the automatic stabilisers. We say yes to that; the right hon. Member for Horsham wants to cut public spending, but his health and education spokesmen want it to rise. A sensible Opposition would say that welfare to work was in the interests of every constituency. We say yes to welfare to work; Conservatives are against it and the means by which it was created. A sensible Opposition would support the working families tax credit at £190 a week instead of trying to abolish it.

The previous Government were in office for 18 years. They were found out and thrown out. In 18 months, Conservative Members have proved to the country that they are not fit even for opposition.

Does the Chancellor recall that in the House on 27 November last year, I warned him that by 1999 we would be facing not
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an inflationary boom, but a recessionary deflation and that he dismissed that proposition with scorn? Is it not now clear that he and his appointees in the Bank of England have, for the past year, been fighting on the wrong front so that our manufacturers and farmers have been faced with unnecessarily high interest rates and a dangerously damaging high pound? Does he accept any personal responsibility for that grave economic misjudgment?

The hon. Gentleman would not have made the Bank of England independent—[HON. MEMBERS: "Answer the question."] I am answering the question. [HON. MEMBERS: "Answer the question."] The Conservatives are getting very excited this afternoon, but after the failure of the shadow Chancellor.

The policies that we have put in place are exactly right to deal with the problems of the British economy. The hon. Gentleman would oppose the Bank of England's being independent. He would have opposed our taking action to deal with the inflationary problem in the economy. He gave us no support when we cut the fiscal deficit by £20 billion. They were the right decisions for Britain. They were right because they put us in better stead to deal with any problem that the global economy presents. Had we pursued the policies that the hon. Gentleman was following, we would not be able to respond as we are now to the global downturn.

Liberal Democrats favour recycling, and there was a great deal of recycled material in the Chancellor's statement. We shall of course give our own response to the detailed proposals during the consultation process, which we welcome because we think it is a better way of doing Budgets. Of course, we welcome the £250 million for the national health service, which we hope will mean that we are able to get through this winter without waiting lists rising again.

Nevertheless, does the Chancellor recall telling the House in his first Budget statement, in July last year, that the goal was to rebalance the economy so as to control inflation
without damage to industrial and exporting prospects"?—[Official Report, 2 July 1997; Vol. 297, c.305.]
Since then, is not it his lack of policy that has led directly to an over-valued pound, which is higher than in the 1990 recession, and to real interest rates that are higher than during the 1980 recession? Has not there been a gap between diagnosis and cure? Is not it now clear that it is the Chancellor's own policy gap, rather than industry's own productivity gap, which explains the economic downturn that we are now experiencing and the risk of manufacturing recession next year that he is forecasting? When will the Chancellor stop blaming other people? When will he end the blame game and not duck his own responsibilities?

The Chancellor also told us in his previous Budget seven months ago that the United Kingdom's direct trade with the troubled Asian economies is not particularly large, which is not exactly what he said today. Does the Chancellor agree with the CBI, which said yesterday that it was not productivity but
the strength of sterling which has undermined the ability to compete at home and abroad"?692
The Chancellor's new forecast is that manufacturing industry may just Miss recession next year and that any overall slow-down will be mild and short. Is he aware that, as the shadow Chancellor said, many independent forecasters outside the House regard that as complacent and unrealistic? Does he agree with the House of Commons Library that manufacturing job losses— [Laughter.] It is interesting that Labour Members below the Gangway should laugh when manufacturing job losses are running at the rate of 300 a day, and, according to the House of Commons Library, will be running at 600 a day next year. Does the Chancellor realise that today's new tax loopholes, dressed up as well-meaning tax tinkering, will have only a marginal effect on that outlook?

Despite his optimistic forecasts, will the Chancellor take this opportunity to accept that the balance of the policy to date has been wrong? Will he promise to change that policy and make it an overriding priority to create the conditions necessary to enable the Bank of England to bring down interest rates, even if that means delaying his 10p tax rate? Would not it be a tragedy if complacency today were to lead to thousands of job losses in industry next year?

On the hon. Gentleman's first point, I am grateful that he, unlike the Conservatives, has welcomed what we have done in respect of national health service expenditure, but I must say that we have done far more than the Liberal Democrats ever put forward as their policy at the general election. We have made available £2¼ billion extra this year and £21 billion in the three following years.

As for the hon. Gentleman's points about the general economy, he must be one of the first to admit that when US $3 trillion has been wiped off stock exchanges around the world—10 per cent. of world GDP—it is bound to affect people's investments and companies' decisions about jobs.

The hon. Gentleman will also agree that, when world trade growth falls from 11 per cent. this year to 4 per cent., and is scheduled to be the same next year, there will be problems which every industrial country has to deal with. If he went to America, to the rest of Europe or to Japan, he would see other countries facing up to exactly the same problems. The issue is whether Britain is properly equipped to tackle the problems—indeed, any and every challenge from the global economy.

The hon. Gentleman should go back to our first Budget, which he has quoted. I said that we were creating a long-term framework for monetary policy and fiscal policy in this country. That is what we have done. As a result of the decisions that we have made, through the Bank of England becoming independent and tackling inflation, we are meeting our inflation target. Everyone expects us to meet that target in the time to come.

As a result of cutting the fiscal deficit from £28 billion to £8 billion in the first year, and taking further action this year, we are eliminating that current structural debit— something that the Conservative party never did all the time it was in government. We are creating the conditions—the long-term framework—for monetary and fiscal stability. It is on that that we will be tested, which is right.

On employment, the hon. Gentleman should acknowledge that, over the past 18 months, nearly 400,000 extra jobs have been created in our economy;
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that welfare to work has got into jobs thousands of young people who would not otherwise be in work—without any help from the Conservative party, which opposed the windfall tax; and that the Government are doing more, not only to create job opportunities and training, but to help to make work pay. I should have thought that the Liberal party would start to support that as well.

On the hon. Gentleman's taxation proposals, they seem to be very different from the proposal for a £30 billion tax cut that he made to the Liberal party conference.

I thank my right hon. Friend for his remarkably good statement, especially with reference to those who are poor, have disabilities or are without hope.

I urge my right hon. Friend to make sure that the new deal project is a total success, so that those without hope and those without training can be sure of his support so as to ensure that all the programme's targets are met. Will he remind Conservative Members that, in the early 1980s, Mrs. Margaret Thatcher, Sir Keith Joseph and Sir Geoffrey Howe destroyed more than 2 million jobs in two short years? They also created Europe's largest redundancy ever, in my constituency—8,000 steel jobs between a Christmas and an Easter. My right hon. Friend's statement is much welcomed in the country.

My hon. Friend is absolutely right. He knows at first hand what is happening in Wales and in industry throughout the country. He is absolutely right about what happened: manufacturing output fell by 7 per cent. in one year, manufacturing investment in that year fell by 15 per cent. and a million manufacturing jobs were lost. It is precisely because we do not want to return to those conditions that we will not make the mistakes that are proposed by the Conservative party on economic policy.

On the new deal, I have heard Conservative Members sniggering and sniping at something in which they also were invited to play a part.

The shadow Chancellor, after a few months of the new deal, which started last April, is now ready to say that it is a failure. That is what the Conservative party wants to happen: it never supported the new deal and refused to back the windfall tax on the utilities, and it is now suggesting that the new deal is failing young people around the country when thousands of them have been joining the new deal every month. I hope that, on reflection, the Opposition spokesman will withdraw those comments.

The House will have noted that the Chancellor's calculations depend very much on substantial increases in growth in the last two years of the cycle, which are some way away. How can anyone believe those figures when the Chancellor's projections last year, and the ones that he is making now, are so different for next year, and when our growth
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performance in the European Union means that Britain is moving from its position as one of the higher growth countries to the lowest next year?

Will the right hon. Gentleman answer this question, which he has failed to answer so far? Given the importance of pension funds, and increasing take-up of them, will he confirm that he has no further plans to raid pension funds or to reduce the tax incentives for those contributing to them?

First, there is no such proposal, nor is there any proposal for a windfall tax on the banks, as the Conservatives suggest. The Conservative Government introduced a windfall tax on the banks, and it is unfortunate that they did not support our tax on the utilities.

Secondly, on the general question about the economy, it is because we have got inflation under control and have taken action to eliminate the structural deficit that monetary and fiscal policy can now work together. The right hon. Member for South Norfolk (Mr. MacGregor) will remember the position faced by the Conservative Government in the early 1990s. Even at the worst stage of the economic cycle, interest rates had to be above 10 per cent. for years because of their failure to control the inflationary tendencies in the economy. As a result of their failure to control public spending, at the worst point of the spending cycle the deficit was £50 billion. I could give Conservative Members more figures to show what happened.

The Conservative Government failed to take action to eliminate the deficit. Because we have taken early action to tackle inflation—which the Conservative Government never took—and because we have been eliminating the structural deficit, monetary and fiscal policy can work together—I think the right hon. Gentleman understands that point. That is the basis on which we have made our forecasts for the economy. The right hon. Gentleman will find that sensible economic commentators agree with us.

I warmly welcome my right hon. Friend's commitment to enterprise and innovation, and his recognition that high-tech companies require special financing measures. Will he undertake to study carefully the collapse of Ionica last week to see whether special lessons can be learned from that innovative, high-tech company, whose collapse had nothing to do with interest rates—[Interruption.]—or with the exchange rate?

My hon. Friend has done a tremendous job working with the science industries in her constituency and throughout the country. It ill befits Conservative Members, who know nothing about what is happening in individual constituencies, to sneer at my hon. Friend's comments. She is absolutely right. The high-tech industry faces problems of financing. There have been particular difficulties in attracting and developing science-based industries in this country.

My right hon. Friend the Trade and Industry Secretary is examining these matters. I acknowledge the work that my hon. Friend has done in pushing this process along. We shall deal with these problems, and we shall look
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practically at the barriers to job creation and to opportunity in this country. We shall not pursue the dogmatic policies of the Conservative party.

The Chancellor has just said that he will look practically at problems. What in practical and real terms do the Chancellor and his colleagues intend to do effectively to reduce the costs of employment over the next crucial two or three years against a background of almost certainly rising unemployment? The Chancellor knows that, together with his colleagues in government, he has already increased the costs of employment, thus contributing to the real problems of the manufacturing and service sectors.

The right hon. Gentleman implies that the situation is all bad. He should acknowledge that there has been a 19 per cent. fall in unemployment in his constituency since the general election. There has also been a fall in the constituencies of many other hon. Members, who should acknowledge that employment has been rising.

As for future policies for employment, the right hon. Gentleman should also acknowledge that we have cut corporation tax to 30p, cut small business corporation tax from 23p to 20p, introduced a new 10p rate of capital gains tax, are cutting national insurance employers' contributions for low-paid employees, and have cut national insurance for employees. Those measures will help employers take on additional workers. The right hon. Gentleman will find that many employers say that they wish a Labour Government had been in office years ago.

Does my right hon. Friend know why Opposition Members make no mention of help for the disabled in jobs, help for minimum income families, and help for small businesses? Why do they make no mention of the venture capital industry, one-stop VAT and national insurance, linking enterprise and universities, the new deal, and extra cash for health and education? Is it because the black hole is between their ears and they cannot hear?

I am grateful to my hon. Friend for reminding us of the range of policies that we have introduced and which the former Government failed to introduce. Yesterday, when the House considered the international financial system, the Conservatives had absolutely nothing to say. On monetary policy, they cannot tell us what they would do about the Bank of England. As for fiscal policy, against the advice of the Confederation of British Industry and almost every sensible commentator, they want to cut health and education expenditure over the next year. The sooner the Conservative party wakes up to economic realities, the sooner it will have a chance of being listened to by the British people.

Will the Chancellor of the Exchequer understand that people listen with some doubt to his talk of a solid, long-term strategy for the economy, given that that strategy has altered considerably since the original announcement in the Budget 16 months
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ago? As we move into recession, there are few who would have considered that he could squander a golden inheritance quite so quickly.

Will the Chancellor answer one question? We know about the increase in education and health expenditure to which he has referred, but we should also consider a number of other announcements that were included in his statement. Will he give us some figures showing what increase in expenditure they will involve? The statement included no costing of that expenditure.

The right hon. Gentleman talked of the so-called golden legacy. I have to tell him that the "golden legacy" was a £28 billion public deficit—3.5 per cent. of national income—which the last Government had failed to tackle, and which we had to tackle on coming to power.

The right hon. Gentleman also talked of the long-term strategy. Our long-term strategy is this: to have eliminated the current structural deficit, to have reached our target on inflation, and to enable monetary and fiscal policy to work together for stability and growth in the economy. It is because we have made those tough decisions on public finances, and cut the deficit—something that the Opposition never supported and have never done—that we are now in a position to spend £40 billion— [Interruption.] The Conservatives left a deficit of £28 billion, claiming that that was a golden scenario. They are now saying that to borrow even £1 is an absolute disaster. What is the view of the Opposition?

As for health and education, the right hon. Member for East Devon (Sir P. Emery) was right to ask whether we had budgeted for the money that we are going to spend. The answer is yes: the prudent assumptions are the ones that I have listed. Moreover, because we have underspent as a result of choosing priorities and cutting waste, we shall be able to spend an extra £250 million before the end of the financial year.

The whole House welcomes the extra £250 million that is to be spent on the health service, but may I ask a question about monetary policy? My right hon. Friend will know that today Sainsbury marked down its profits forecast, citing the exchange rate and the approaching turndown as part of the problem. We all support my right hon. Friend's intention to bear down on inflation, and most of us understand that Eddie George is doing his best within his narrow frame of reference; but does my right hon. Friend accept that, in the very long run, there may well be a case for looking at the framework in which the Monetary Policy Committee operates, and putting on that committee people who are known to have some understanding of and feeling for industry in the north, the midlands and elsewhere?

The Monetary Policy Committee is not to be made up of representatives of this pressure group or that. It is a group of people chosen for their expertise in certain areas. What I have been intent on doing—in the
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knowledge that I have of the Bank of England, and of what it has been intent on doing—is building up in every region, and in Scotland, Wales and Northern Ireland, an expertise in all areas of the economy, so that that expertise can be fed into decisions on monetary policy. That is the right way forward. It is the way in which independent banks have worked in other countries—and I venture to suggest that no political party in the House would end the independence of the Bank. I believe that, on reflection, the Conservative party will change its mind, and stop opposing it.

Of course some matters of detail that the Chancellor has announced today, such as the encouragement of science, innovation, technology transfer and employee share ownership, are sensible; but on the wider economy, I wonder whether the Chancellor is sanguine about the fall in interest rates that will be necessary if we are to converge with the rate that is set by the European Central Bank. In that context, how will he set his active fiscal policy, to use his words, over the next year or two—or does he think that, as a result of the meeting in Austria last weekend, the change in the economic and stability pact will mean that more borrowing on the continent will force the European Central Bank to put rates up to converge with ours?

I know that the hon. Gentleman takes a special interest in matters European, even if that sets him against his Front-Bench team, but on this point, I disagree with him. The worst thing to do would be to rush headlong into monetary union by cutting interest rates just for the sake of dealing with the present situation. The Liberal Democrat party is proposing interest rates at 3 per cent., or something similar.

We have to base the decision on monetary union on the economic tests that have been set down and with proper preparations, leaving the final decision to the British people, but the reason why I believe that economies will, over time, converge is that we are taking action to remove the boom-bust cycle in this country and we will, in time, have a smoother economic cycle than ever existed under the 18 years of the Conservative Government.

I congratulate the Chancellor on his statement, which reaffirms confidence in his handling of the economy. Will he make a statement, first, on the curious reaction of Opposition Members who, when they hear that we have not been set off course, display a mixture of mirth and consternation; and secondly, on the role that he envisages for regional development agencies in taking forward his important agenda of support for business, including technology transfer and commercial development of the knowledge in our universities, so that we can ensure that all the regions benefit? I remind him that, as part of their negative approach to anything that brings jobs and employment, the Opposition opposed the setting up of such agencies.

When the record of this Parliament is written, the Opposition's opposition to the regional development agency proposals, the minimum wage, the working families tax credit, the independence of the Bank of England and to spending sensibly on health and education will be a blot on their record for all time.

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I met the chairmen of the new regional development agencies and, with the Deputy Prime Minister, talked to them about their work. I believe that, like Scottish Enterprise, the Welsh Development Agency and the Northern Ireland Development Board, an immense contribution can be made at a regional, Scottish, Welsh and Northern Irish level to the development of the economy.

On my hon. Friend's comments about the Opposition, in all their difficulties—when they had the poll tax, all the problems over the health service, sleaze and everything else—it used to be said of the Conservatives by some of the press that they were at least competent in the management of the economy. That can no longer be said of the statements that are being made.

Will the Chancellor accept that manufacturing industry is the main source of sustainable non-inflationary economic growth? Will he therefore take seriously the request made of him by the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) relating to the criteria on which the Monetary Policy Committee takes its decisions— because without manufacturing industry, this country is lost? Is it right that, with inflation at 2.5 per cent., business should be paying around 10 per cent. or more in interest to the banks for money that they borrow to invest in employment?

The hon. Gentleman has spoken on manufacturing industry throughout the time of his Government and ours. The review that we are setting up with Mr. Don Cruickshank will look at how the banks are servicing the needs of industry, and I hope that the hon. Gentleman will want to feed in his comments to that.

On interest rates and the Bank of England, as someone who has followed that matter for many years the hon. Gentleman should understand that the causes of low growth and high inflation in the British economy have been the same. They have included the lack of capacity in the economy; therefore, every time there has been growth it has been unsustainable because of the development of inflationary pressures. It is by tackling that problem head on—the independence of the Bank of England helps that—and by creating a credible framework for action that we can begin to address the long-standing problem of stop-go.

As regards individual instances in innovation, investment, training and skills shortages, we are doing what we can, working with manufacturing industry, to deal with some of the problems it faces. I think that the hon. Gentleman will know that the pound is now 10 per cent. down from its peak and is now lower than it was when we took office.

I, too, congratulate my right hon. Friend on his statement, particularly the emphasis on research and innovation. Bearing in mind that even his predecessor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), acknowledges that Britain's debt to GDP ratio is one of the lowest in the world, will he consider further investment in public sector infrastructure, particularly housing and transport? That would benefit business
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confidence and help to ensure that the gloomy predictions of a rise in unemployment of 500,000 over the next three years do not come true.

Employment has risen by 400,000 and many of those who have been making predictions every month for the past year that unemployment would rise were found to be wrong in February, March, April, May, June and July. On future public investment, I think that my hon. Friend will acknowledge that not only have we doubled public investment over the next three years, but we have enhanced the private-public partnerships to invest £13 billion more in the economy, thanks to the work of the Paymaster General in moving that project forward.

On capital receipts and housing—my hon. Friend mentioned housing in particular—at the time of the comprehensive spending review, we announced a further release of capital receipts to enable house building and house repair to move ahead. When my hon. Friend looks at the figures in the pre-Budget report, she will see that public investment next year rises considerably, which means that investment as a whole in the economy continues to rise. My hon. Friend will want to acknowledge that the Government have done a great deal to move public investment forward. We are never complacent, but we will continue to take the necessary action.

When the right hon. Gentleman first became Chancellor, the OECD in Paris forecast that British growth of GDP would be the highest in the European Union and was likely to continue to be so for the foreseeable future. Will he accept any responsibility for the fact that it is now forecast to be the lowest, and that we may have recession? If he is so interested in research, why did he slash the funding for the research councils this year to the point where, in university after university, there is no money to fund postgraduate research?

When I became Chancellor and walked into the Treasury one of the first things I was told was that the inflation target could not be met, that inflation would rise to 4 per cent. and above and that inflation—

The right hon. Gentleman does not seem to understand basic economics. When one sets interest rate policy, it is set with a view to the next 12, 18 and 24 months. If action is not taken early enough, interest rates will have to rise later to deal with the problem of inflation. The truth is that when we came into the Treasury, we were told that inflation would rise and that it would be twice that of our competitors.

We also know—the Bank of England had been saying it for the previous six months—that the previous Chancellor had failed to raise interest rates when it was necessary to do so to deal with inflation. It was exactly that problem of short-termism in the making of interest rate decisions that we dealt with by making the Bank of England independent. I would have thought that, as a sensible Back-Bench Member of Parliament, the hon. Gentleman would have supported our action.

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On science, the hon. Gentleman should acknowledge that the provision of £1 billion to the Wellcome Trust and investment in our universities and science laboratories has been widely welcomed throughout the country. Now that we have in place measures for the commercialisation of inventions through the university challenge fund and the new institutes of enterprise that I have announced today, science has been given a boost by the Government that it never had under the previous Administration.

Does my right hon. Friend recall the winter of crisis in 1996–97 under the previous Government, when in hospitals in north-west London people were not simply in the waiting room or stacked on trolleys, they were stacked back on to ambulances? Does my right hon. Friend understand the joy and relief that will greet his statement today at the further £250 million to avert a winter crisis in our hospitals? Given the apoplexy among Conservative Members that has greeted his statement today, will he consider bringing forward those payments to meet the pressing need that would appear to be found on the Opposition Benches?

I am grateful to my hon. Friend. He is absolutely right about what happened to the health service under the previous Administration. The total increase in spending on health as a result of all the measures we are taking will be nearly £32 million per constituency over the next three years. I think that the measure we have announced today, to give £250 million to the health service for the next five months to deal with the winter problems that may and sometimes do arise, shows that the Government want to see the national health service safe in our country. It is simply a pity that the Opposition cannot welcome it.

The hon. Gentleman should look at what the Bank of England said on this matter. It said that the public spending decisions that we have made were in line with what it was expecting. If the hon. Gentleman looks at the August inflation report, he will see that it says exactly the opposite of what the hon. Gentleman is suggesting.

Does the Chancellor recall that in 1991 the then Conservative Government denied responsibility for the recession and blamed it on world economic affairs? Will he contrast that with their attitude now that they are in opposition: that the current slowdown in growth has nothing to do with world economic affairs? Does he believe that they were misleading then or now? Does he think that the bizarre—

The Chancellor referred earlier to the development of the Welsh economy. Can he confirm that his spending plans
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will provide for the Treasury to pay match-funding in the event of the European Union according objective 1 status to west Wales and the valleys?

I can tell the hon. Gentleman that the comprehensive spending review dealt with those problems. The generous settlement made for public spending for Wales will allow industry, training, education and, of course, all the economic agencies to benefit from public money.

Does the Chancellor accept that most people represented by Labour Members, and possibly most of those represented by Opposition Members, accept that the purpose of his prudence in preventing overheating of the economy is being delivered in the public expenditure announced today and in previous Budgets? Does my right hon. Friend accept that what was described as wonderland economics is a joy compared with the blunderland economics of the previous Government?

I want to deal with the connection between inventiveness and enterprise and the university challenge fund. Is my right hon. Friend aware that some university representatives are saying that the venture capital organisations in the United Kingdom are slow in taking up the offer of intellectual property? Can he give us an assurance that he will look closely at the transfer of intellectual property so that it does not leave the country but is a boon to the country; while at the same time encouraging venture capital companies to form partnerships with the universities, which are very willing to do so?

I am grateful to my hon. Friend, who has taken a special interest in the matter. In the seminars on productivity that we held with business men and women, which drew on expertise not only from Britain but from across Europe and the United States, it became clear that the venture capital industry could do more in Europe, and Britain, to service high-tech and scientific inventions that may give rise to commercial products. The venture capital industry is doing far more in the United States, and people sometimes doubt whether Britain would have been able to cope with a company such as Microsoft, as the initial venture capital support would not have been available. We have taken some of the measures that we have taken for those reasons.

The university challenge fund is very much over-subscribed, as there was massive interest in it. I hope that we can extend the private partnership, so that there is backing for the public funds that were made available to the tune of £60 million. Our institutes of enterprise, which we are establishing today, will do a great deal to help transfer technology and bring scientific inventions to the
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marketplace. I hope that, over the next few months, my hon. Friend will be able to follow developments in those matters.

I thank the Chancellor for the role that he played in the Industrial Development Board's recent trip to the United States. However, will he consider the views of the CBI Northern Ireland on a possible industrial fuels tax? Northern Ireland's road freight industry is already suffering, and power is much more expensive for people in Northern Ireland. Even an industrial fuel tax applied uniformly across the United Kingdom would place an extra restriction on Northern Ireland industry's ability to compete. Such a situation would create problems for the Chancellor in fulfilling his guarantee to give employment opportunities to the long-term unemployed.

I am grateful for the hon. Gentleman's first remarks, and welcomed the opportunity to join some of his colleagues in the United States for the launch of the investment programme for Northern Ireland. I believe that there is a willingness on the part of business in the United States to make new investment in Northern Ireland, particularly since new incentives—including our action on education, training and work—will make it very attractive to invest there. I shall regard the hon. Gentleman's second set of comments, on industrial fuel, as one of the first Budget representations.

I congratulate my right hon. Friend on holding fast to his spending plans, which are just and will create jobs. The Government intend to be a Government of the left and a Government of enterprise. For regions—such as my own in north-east England—that are facing the sharpest pressures of world markets, can he offer the prospect of any specifically regional programmes of public spending and development, to underpin the great work that he is set upon?

We are a Government of enterprise and of fairness. Conservative Members who believe that enterprise is achieved only at the cost of fairness, and that fairness is achieved only at the cost of enterprise, are living in the world of the 1980s—when it did not work, and Britain ended up as an unequal, unfair and, eventually, economically unsuccessful society.

Our proposal for regional development agencies—with which my hon. Friend has long been involved—is a means by which we can bring expertise to helping develop industries in the north. Our proposals on training and employment are also working at a regional level. Moreover, I think that my hon. Friend will agree after hearing some of today's scientific announcements that there is encouragement for regions to think of how they might apply for some of the funding.